Variance Analysis Advantages And Disadvantages

The purpose of this paper is to describe the budget process, variances and the major reasons of the variance to make all the financial decisions of the firm properly. This paper would also be helpful to explain that “make” or “Buy” decisions also play a significant role to improve the efficiency of the firm. In addition, the paper would also be useful to clarify that non-financial performance measure may be unsafe for the image of the firm.

There are also various cost assumptions used by businesses, with every entity choosing a respective method in accordance to their inventories, based on the effects they

After that time, VaR has become embraced by the Governing Bodies overseeing the world bank. In essence, VaR measures the probability of loss or gains related to capital stock. Furthermore, the understanding of the chance of loss or gain can be extended over the economic life of a project (Cecilia-Nicoleta et al.,

With the increasing ramification of economic changes and complex business functioning, each and every company has to implement budget variance analysis to identify the fluctuation in projected amount. In this report, Peyton Approved Company has been taken into consideration to evaluate the effectiveness of business functioning and plant’s operation in determined approach. It reviews the efficiencies and effectiveness of their plant’s operations. With the help of budget variance, it could be easily determined whether Peyton Approved Company has been performing its business throughout the time. Budget variance is the technique which is used by Peyton Approved Company to identify the fluctuation and variability in the set budget and implemented project. Budget variance is defined as differences between the actual amounts of expense incurred by Peyton Approved Company. It is evaluated that when Peyton Approved Company has positive cash flow in its planned budget. For instance, if amount of expenses incurred by company is less than its planned or estimated budget expenses then company has positive budget variance and vice-versa. This could be defined with the estimation of cost budget variance. The formula for the same has been given as below (Steffan, 2008).

This was favorable, but the Efficiency Variable was 100,000 unfavorable. This suggest that Competition Bike received a great price, but with the unfavorable Efficiency there were a lot of left over materials suggesting the material might not be the best quality. Direct Labor had a 150,000 Unfavorable Variance, but had a 50,000 favorable Efficiency Variance. The labor cost was up due to the high skill level needed for the bike manufacturing. The 50,000 favorable Efficiency Variance enabled the high skill labor to perform the task very efficiently. The Manufacturing Overhead had a 24,000 unfavorable Price Variance, and a 2426 unfavorable Efficiency Variance. The Advertising Cost had a 5,000 unfavorable Price Variance and a 1246 favorable Efficiency Variance. This suggest that Competition Bike spent more on Advertising in order to boost lagging sales, and the favorable Efficiency Variance shows that even though more was spent than budgeted, the money spent was efficient and worth the increase. The Transportation Out had a 3207 unfavorable Price Variance and a 2400 unfavorable Efficiency Variance. This suggest that Transportation cost were up due to increased fuel cost, and this increase in cost resulted in unfavorable Efficiency Variance due to transporting fewer bikes with increase in fuel cost.

3. Post the file from the same page where you accessed this Assignment, using the

- Cost Variance (CV): The Cost Variance indicates a value which is a measure of how much the project is either overspent or underspent at any given point in time. For any given point in time, once the EV and AC are known the CV can easily be calculated. The formula for CV is quite simply: CV = EV – AC. Here a positive value indicates that the project is under spent at the current point in time and a negative value would indicate the opposite that a project is over spent at the current point in time. The Cost Variance at the end of the project is calculated as follows: CV = BAC – AC. The same above rationale is applied to positive and negative numbers to indicate if the project is under spent or over spent respectively.

Standard prices allow us to set the expected value of the goods and from this we can then calculate variances such as price and quantity variances which allow us to do responsibility accounting.

Determine the actual costs incurred during the month of May for direct materials, direct labor, and manufacturing overhead.

Standardizing the cost management system companywide is an important step in improving the link between cost management and

Overhead costs include rent, office staff, depreciation, and other. Once the flexible budget was complete, variances between the actual and flexible budget could be calculated (Exhibit B). The variance for frame assembly was favorable with actual costs being $82,663 less than in the flexible budget. The variances for wheel and final assembly however were both unfavorable. Wheel assembly had an unfavorable variance of $50,650, while final assembly variance was the highest at an unfavorable variance of $231,200. Taking into account these three aspects of direct cost, direct cost has an unfavorable variance $199,187. Although most overhead costs are fixed, 2/3 of other costs are variable and increase with the increased production. As shown in Exhibit B, overhead variance is unfavorable at $60,000. The direct cost variance and overhead variable together lead to a total unfavorable variance of $259,187.

Businesses – from manufacturing, merchandising and service industries alike – take careful considerations for their costing systems. Setting-up competitive prices in the market can be a result of proper costing methods. Misallocation of costs may lead to incorrect price estimates, continuous production of unprofitable products, and ineffective processing schedules. In this case study, we will discuss the costing methods Zauner Ornaments are currently using and upon conclusion, it will enable us to distinguish the advantages and disadvantages of each costing method.

The information used to calculate the total direct material and total direct labor variances are retrieved from the cost/ price variance and efficiency variance data. The material variance is zero, meaning there have been no changes for the cost of materials. The labor variance was favorable due to a fall in the labor rate. The efficiency variance for direct labor tells management how efficient the direct labor was in making the actual output that was produced by the direct labor. With that being said, in this case it is considered unfavorable. This is because, both the labor rate and efficiency of the labor has been reduced. The areas that should be reviewed at Peyton Approved include product design, reduction of scrap,

During the evening, she spent several hours studying the operating expense categories, eventually preparing Exhibit 3, which showed budgeted operating expenses by category and her judgment about their degree of variability. She also listed the actual operating expenses for the period on the exhibit.

Cost variance is calculated by subtracting budgeted cost for work performed from actual cost for work performed and schedule variance is calculated by subtracting budgeted cost for work scheduled from budgeted cost for work performed. The vice president’s analysis that the project’s costs are overrun is correct and it appears they are also behind schedule. I would agree with the vice president’s analysis that improvements need to be done to keep the cost and schedule under control.